Sole director's actions could not justify 'piercing corporate veil', Privy Council rules

Out-Law News | 01 Nov 2017 | 10:19 am | 2 min. read

An individual was not liable for rent arrears under a lease granted to his company, even though the company was only formed after negotiations about the draft lease had concluded, the Judicial Committee of the Privy Council has ruled.

The court, which consists of UK Supreme Court judges and acts as the highest appeal court for several Commonwealth states, found in favour of Dave Persad in his appeal against a decision of the Court of Appeal in Trinidad and Tobago. The trial court judge had concluded that Persad used his company as "an avoidance mechanism", and that Persad had "concluded the negotiations in his personal capacity [and] then formed the company".

Former Supreme Court president Lord Neuberger, giving the judgment of the court, said that the facts of the case "[did] not begin to justify piercing the veil of incorporation".

"Piercing the veil is only justified in very rare circumstances," he said.

"In this case, Mr Singh [the landlord] cannot get near establishing any evasive or frustrating action on the part of Mr Persad. Mr Persad was under no relevant 'legal obligation or liability' to Mr Singh at the time that he proffered to Mr Singh the draft lease executed by CHTL [the company] or at the time that the lease became binding ... Mr Persad did not give any sort of assurance that he personally would take the lease or that he would not put forward a limited company as the lessee, when the proposed lease came to be drawn up. Further, it is not as if Mr Persad misled Mr Singh in any way," he said.

The fact that Persad had personally occupied the premises was irrelevant, given that he was director and shareholder of the company, the judge said. It also did not matter that CHTL was effectively a 'one man company', or that Persad did not produce any documents relating to the creation or constitution of the company.

Persad originally contacted Singh in early 2002 with a view to leasing his premises as office space and for a new restaurant. The two men agreed that Persad would take a five-year lease of the premises starting on 1 April 2002.  In March 2002, Singh allowed Persad to occupy the premises in advance of the anticipated grant of the lease, so that he could carry out some decoration and improvement work. Persad, who is a qualified attorney, then prepared a draft lease, with a company called Chicken Hawaii (Trinidad) Ltd (CHTL) as lessee.

Although Singh did not sign and return the lease until 1 May 2002, he did not challenge the fact that the lease was entered into with CHTL rather than Persad. He also told the court that he was aware that CHTL's status as a limited company meant it was a separate legal entity from Persad. However, in September 2004, when he began proceedings to repossess the premises and for rent arrears and damages, the proceedings were issued against both CHTL and Persad.

CHTL has not challenged separate findings of liability against it by the judge.

In his judgment, Lord Neuberger said that the ability to look beyond the company's legal status and to hold a director personally liable needed more than to merely claim that the company was a 'front'.

"Such (mildly) pejorative terms can only too easily be invoked to justify a decision which is both unreasoned and wrong," he said.

Commercial litigation expert Craig Connal QC of Pinsent Masons, the law firm behind, said that the judgment of the Privy Council was "a reminder of key fundamental principles".

"It can no doubt be difficult from time to time for judges at first instance to resist the siren call to focus on what seems to be fair, and potentially to lose sight of the technical law," he said.

"In the present case, phrases such as 'acting as a front' and 'to avoid personal liability' did not go far enough to allow the judge to lift the corporate veil. The judges in fact pointed out that avoiding personal liability was in a sense the whole point of corporate structures," he said.